Monday, July 18, 2011

How will China's housing bubble end?

The more things change --another bout of sovereign debt concerns in the eurozone periphery; grandstanding in Washington; heightened demand for gold-- the more they stay the same.

The dynamics of the global capitalist system has left me convinced that a major correction --if not crash-- is likely in 2011-12 given that nothing has been changed fundamentally in a structural sense: imbalances remain while rhetoric reigns.

Because of the integration of China into the world economy, a bursting bubble can cause negative spillovers to other countries, particularly in the Asian region. The challenge for the government is to scrap out speculative activities without killing an engine of GDP growth.

Just how the spillovers mentioned above will transpire is anyone's guess but one does not have to be a screaming Cassandra to recognize that amongst the industrialized economies, it is Australia --as China's commodity exporter of choice-- that is most vulnerable. Will Australia regret its booming business with China? The mining magnates such as Clive Palmer will be sheltered given their billions but the Australian public in general, and highly indebted middle class in particular will be vulnerable.

The taming of inflation in China, and elsewhere for that matter, will be done on the backs of those who can least afford it via a bursting of the asset bubble and ensuing high unemployment amongst lower and middle income earners. If the skilled mandarins in the CPC and PBOC are able to generate a soft rather than hard landing then they will rightly lay claim to being the world's best. Time will tell if they can manage to do so amid a highly financialized and increasingly volatile global system.